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Good TMF article about Core

Short version of business description from the article [will let you skip down to Q3 results past the expanded version of the business description—]

Core Lab is in the reservoir optimization game. That means analyzing drill core (hence the name) and the various fluids (oil, gas, and water) produced by a well. The latter is an ongoing process as an oilfield matures. As oil prices plunge, I would think the world's major producers have to be as focused as ever on getting the most out of existing assets.

In addition to helping the majors get the most out of their legacy oil fields, Core Lab also does a brisk business in fracture diagnostics. We've observed a paradigm change in the North American onshore market in favor of horizontal drilling. Multi-stage fractures, which free up gas flows along the horizontal section of a well, are a key contributor to the ripping results recently reported by Petrohawk Energy (NYSE: HK) in the Haynesville shale. While onshore rigs are being laid down left and right, horizontal drilling is a game-changer and is here to stay. That, in turn, keeps Core Lab plenty busy refining its fracture techniques and peddling its perforating charges.

Core labs is an oil and gas services company that focuses on the reservoir once it has been discovered and is either ready to be developed or is in development and production

They provide technology to that improves reservoir performance. The goal is to maximize production and lower the costs of exploration and production.

While the aggregate number of wells being drilled per year has fluctuated relative to market conditions, oil and gas producers have, on a proportional basis, increased expenditures on technology services to improve their understanding of the reservoir and increase production of oil and gas from their producing fields.

Core offers products and services globally

Core operates in three segments

- Reservoir Description--- characterization of petroleum reservoir rock, fluid and gas samples.

- Production Enhancement--- relates to reservoir well completions, perforations, stimulations and production. The service evaluates the effectiveness of well completions and develops solutions aimed at increasing the effectiveness of enhanced oil recovery projects
- Reservoir Management: Combines and integrates information from reservoir description and production enhancement services to increase production and improve recovery of oil and gas

The company offers these services and that accounts for around 75% {they also sell perf products] of the business. The service business is probably a wider moat business than the perforation products. Qualified trained personnel and proprietary products create barriers to entrance of sorts.

Core offers products including perforation products. For those that follow BOOM, you may recall they just acquired a small explosives business that does perforations Many of the oil and gas services companies have similar products. It’s competitive.

Reservoir description segment

Most oil and gas fields are a unique blend of porous rock, oil, gas and water

Natural gas typically caps the field and overlies an oil layer, which overlies the water. Gas expands, water coats the rock/sand particles and oil flows out as the gas expands.

Core lets producers determine quality and measure quantity of the fluids and their derived products. This includes determining the value of different crude oil and natural gases by analyzing the individual components of complex hydrocarbons. These data sets are used by oil companies to determine the most efficient method by which to recover, process and refine these hydrocarbons to produce the maximum value added to crude oil and natural gas._

They analyze reservoir rocks for their porosity, which determines reservoir storage capacity, and for their permeability, which defines the ability of the fluids to flow through the rock. These measurements are used to determine how much oil and gas are present in a reservoir and the rates at which the oil and gas can be produced.

Core produces data to describe a reservoir system that is used to enhance oil and gas production so that it will exceed the average oilfield recovery factor, which is approximately 40%.

Production Enhancement segment

Two production enhancement methods commonly used are

~~Fracing--hydraulic fracturing of the reservoir rock to improve flow

---flooding a reservoir with water, carbon dioxide, nitrogen or hydrocarbon gases to force more oil and gas to the wellbore.

Many oilfields today are hydraulically fractured and flooded to maximize oil and gas recovery.

Fracing is pumping a proppant material in a gel slurry into the reservoir zone at extremely high pressures. This forces fractures to open in the rock and "props" or holds the fractures open so that reservoir fluids can flow to the production wellbore. Core data on rock type and strength are critical for determining the proper design of the hydraulic fracturing job. They also test the gel slurry to see that it is compatible with the reservoir fluids so that damage does not occur to the porous rock network. Core has a proprietary ZeroWash tracer technology used to determine that the proppant material was properly placed in the fracture to ensure effective flow and increased recovery.

SpectraChem is another proprietary technology developed for optimizing hydraulic fracture performance. It is used to aid operators in determining the efficiency of the fracture fluids used. SpectraChem tracers allow operators to evaluate the quantity of fracture fluid that returns to the wellbore during the clean-up period after a hydraulic fracturing event. It enables clients to evaluate load recovery, gas breakthrough, fluid leakoff and breaker efficiency, all of which are important factors for optimizing natural gas production after the formation is hydraulically fractured. _

Other services:

• dynamic flow tests of the reservoir fluids that simulate the actual flooding of a producing zone and monitoring the progress of the flood to ensure the maximum amount of production

• completion monitoring system, Completion Profile, helps to determine flow rates from reservoir zones after they have been hydraulically fractured.

And along these lines the company offers products that perforate. They have several proprietary systems of liners and explosives that are designed to open tunnels in rock and shale that allows hydrocarbons to flow through the formations.

Reservoir Management

Reservoir management is becoming an increasingly important service to make every reservoir produce as much hydrocarbon as possible as efficiently as possible.

Reservoir description and production enhancement is used to maximize daily production and the ultimate total recovery from the reservoir.

This segment is very much service personnel/expertise and data driven To better explain it I have simply downloaded the description from Core itself

The services Core offers from the website because it’s hard to explain:

1) PROMORE--- a technology company providing cost effective solutions to real-time well monitoring systems, which are critical to the successful implementation of Reservoir Management, Production Optimization and Enhanced Oil Recovery projects.

PROMORE's advanced surface electronics in conjunction with the industry unique ERDTM sensor, eliminates the need for downhole electronic components. This combination allows for marked improvement in both reliability and high temperature capability in extreme operating environments.

Instrumentation devices can be conveyed on tubing, casing, suspended or integrated into the patent coil-tubing (CT-MORE) System. PROMORE is the only company that offers a sensor package capable of long-term monitoring to 250ºC (480ºF).

PROMORE differentiates itself by:

1. Having the best reliability in the industry
2. No downhole electronics
3. Highest temperature rating
4. Flexibility and ease of use (fit for purpose)
5. Best resolution available

2) Integrated Reservoir Solutions, a Core Lab Reservoir Management division, was created to conduct specialized Reservoir Optimization projects to help Core's customers meet the challenges of their oil and gas exploration and exploitation programs. Our mission is to provide Core Lab customers with a quality and timely solution to their reservoir problems by integrating the various technologies of the Core Lab Divisions. Drawing from the wide variety of current technologies offered by Core, these projects often include integration of data from the log scale to the pore scale. They are supported by our staff of senior level engineers, geologists and petrophysicists, applying proprietary and state-of-the-art techniques from the earliest phases of exploration through the final phases of production.

To effectively manage the large volumes of geological and petrophysical data associated with consortia projects, Core Lab's Integrated Reservoir Solutions Division developed RAPID™ (Reservoirs Applied Petrophysical Integrated Data). RAPID™ is an Oracle™ database application for sharing exploration and production data among asset team members. Over thirty major, independent and national oil and gas companies are licensed to use RAPID™.

Drawing from the wide variety of current technologies offered by Core Lab, we have developed analytical programs which address current drilling and production challenges faced by our clients worldwide.

Margin by segment

2007 2006 2005
Reservoir Description 26.70% 18.40% 13.30%
Production Enhancement 28.10% 25.80% 17.30%
Reservoir Management 28.60% 22.30% 15.20%
Total Company 27.40% 21.50% 12.60%

We evaluate our operating results by analyzing revenues, operating income margin (defined as operating income divided by total revenue) and income margin (defined as income from continuing operations divided by total revenue). Since we have a relatively fixed cost structure, increases in revenues generally translate into higher operating income margin and income margin percentages. Results for the years ended December 31, 2007, 2006 and 2005 are summarized in the following chart:

Q3 results

Core reported record quarterly revenue of $202,500,000 ---an increase of 19% over year-earlier quarter totals.

Net income for the quarter totaled $39,515,000, or $1.64 per diluted share.

Excluding the foreign-exchange-related losses operating income was $57,434,000 ---up 25% over third quarter 2007 totals. Operating margins were 28%, an increase of approximately 140 basis points. Operating margins were achieved even though numerous Company laboratories in the Texas-Louisiana Gulf Coast region were shut down for over a week due to Hurricane Ike. In addition, the storm affected operational activities of numerous clients in the area for a number of weeks.

Q3 results were made possible by the Production Enhancement segment--offsetting the effects of Hurricane Ike on Reservoir Description operations. Demand for Production Enhancement's patented and proprietary fracture diagnostic services reached an all-time quarterly high as Core's HERO(TM), SuperHERO(TM), and SuperHERO Plus+(TM) line of perforating charges continued to gain market share and greater market penetration. Reservoir Management operations produced its best third quarter results in history.

For the first nine months revenue increased 17% to $579,600,000, while operating and net incomes were $154,357,000 and $102,559,000, respectively. Excluding the effects of foreign exchange losses and one-time gains and charges, operating income increased 29% to $160,976,000 and net income increased 26% to $108,249

Segment Highlights

Reservoir Description was up 15% over third quarter 2007 levels, while operating income decreased 3% to $25,455,000 due to foreign exchange losses

Both revenue and operating income were affected by power outages in the Texas and Louisiana Gulf Coast region that took several laboratory facilities offline for more than a week. Operational activities of Core's clients in the region were also affected for several weeks.

Internationally, Reservoir Description projects continued to expand, and several new projects were started in West Africa, the Middle East and Asia-Pacific regions. Core continues to analyze thousands of feet of core and hundreds of reservoir fluid samples from deepwater fields offshore West Africa. Projects include core analyses, advanced rock properties testing, and fluid phase behavior studies of samples from deepwater fields offshore Ghana, Equatorial Guinea, Angola, Gabon, and Nigeria, among others.

Operations in the Middle East continue to expand in Qatar, Abu Dhabi, Kuwait, Oman, and especially Saudi Arabia. The Company continues to provide reservoir fluid data sets for an enhanced oil recovery project in the super-giant Burgan Field in Kuwait. Cores representing thousands of feet of reservoir rock from fields in Saudi Arabia are being analyzed in that country, as well as in the Company's Advanced Technology Centers in Abu Dhabi and Houston. Asia-Pacific projects include increased workloads from Malaysia, India, Indonesia, and Australia.

Production Enhancement revenue increased 27% and operating income increased 53%. Operating margins were 6% higher than in 2007 The revenue growth rate of 27% compares to a year-over-year increase of only 13% for the North American average rig count. There is high demand for Core's proprietary and patented fracture diagnostics technologies and the Company's complementary HERO, SuperHERO, and SuperHERO Plus+ line of perforating charges and related gun systems.

The SuperHERO + product has been shown to improve production by 15%. Recently, a major oil company client informed Core that it will specify the Company's HERO, SuperHERO, and SuperHERO Plus+ line of perforating charges to complete all of its shale-gas wells drilled worldwide.

Reservoir Management reported revenue of $11,638,000 and operating income of $3,089,000. Operating margins for the quarter increased to 27%.

Core initiated a study entitled "The Petroleum Potential of Offshore Vietnam" in response to strong interest in such a study from many international oil companies following several recent large discoveries of crude oil and natural gas in the Cuu Long basin offshore Vietnam. A key discovery well recently test flowed over 10,000 barrels of oil and 5 million cubic feet of natural gas per day.

Free Cash Flow, Cash Totals, debt and Capex

One of the strengths of this company is the positive CFFO and low capex needs.

For the first nine months Core had $88,500,000 in free cash flow[ cash from operations minus capital expenditures].

Guidance for FCF in 2008 is $110,000,000 in free cash flow for all of 2008.

cash and cash equivalents was $58,275,000

Core has $9 million outstanding on its $100,000,000 revolving credit facility to cover commitments associated with letters of credit and bid bonds

Availability under this committed facility is approximately $91,000,000 bearing interest at the London interbank offered rate (LIBOR) plus 62.5 basis points. There are no plans to draw from the facility.

Debt is $300 million 0.25% Senior Exchangeable Notes
The Notes are scheduled to mature in late 2011. Long-term debt was unchanged from year end, reflecting our $300 million 0.25% coupon convertible debt. Just as a reminder from our last call, these notes were classified in the second quarter as current rather than long-term, as our share price exceeded the $123.18 trigger price for 20 of the last 30 days in the second quarter.

There are some other points re: convertible debt

The converts were “hedged “ by Lehman’s. At the time the converts were sold, lehman’s was paid $86 million with the understanding they would deliver shares to Core if the share price of Core was between $93.99 and $126. This meant no new shares would be issued in the range and the convert would be non-dilutive. Pretty standard note hedge. For reporting purposes, these converts are dilutive on the share count at prices above $93.99. So at $55 they are not added in;ran...

The company will continue to increase the dilutive share count when Core is $93.99 regardless of Lehman just as always However, it is likely Lehman’s is going to deliver the shares in 2011 if required so the shares may be truly dilutive going forward. The company estimates the impact will be 332, 000 shares at year end 2007. They pay cash up to principal and the excess will be granted in shares.

The Notes bear interest at a rate of 0.25% per year and are fully and unconditionally guaranteed by Core Laboratories N.V.

For 2008 Core expects capex of approximately $25,000,000, --- slightly more than depreciation.

Expenditures are being used primarily for the build-out of "The Canadian Center for Unconventional Oil and Natural Gas Evaluation."

Fourth Quarter Guidance

Core expects revenue to be approximately $205- $210 million an increase of 16% to 19% over last year's fourth quarter total.

Earnings per diluted share are expected to range between $1.66 and $1.69, an increase of 22% to 24% ----assuming an effective tax rate of approximately 32% to 33% and incremental margins of approximately 40%.

For full-year 2008, Core now expects earnings per diluted share, excluding one time gains and losses, will range between $6.14 to $6.17-- 26% increase yoy

Guidance from the CC

Core's head of business development, has been actively canvassing our clients for their Q4 and 2009 plans. For the fourth quarter of 2008, we expect year-on-year revenue to increase 16% to 19%, producing an increase of operational earnings of approximately 26%, one of the highest projected increases -- oil field services industry for the fourth quarter of 2008.

For 2009, at present we see no significant change in the planned international activity, or we expect that to be up somewhere on the order of 16% to 18% range.

North American activity, however, is more difficult to determine, as many of our clients' budgets are still in flux. When Core is comfortable in projecting North American activity levels, we will provide guidance for Q1 and for all of 2009.

Interpreting the CC

it was not easy to read between the lines of the CC. Unbelievably, the company does not expect much of a slowdown even as O&G companies announce cutbacks and decrease capex. I don’t know the management having only read this one call through. Are they being realistic? Optimistic? Or delusional?

First a few testimonials and future business

Our Asia-Pacific operations have been working for an independent oil company, providing a broad spectrum of reservoir geology services. In Q3 that company rewarded our excellent service by awarding Core all of their reservoir geology for fields in India, and their expansion abroad.


In Q3 we completed our core analysis contract for a Kazakhstan oil company and were rewarded with a new, exclusive three-year contract based on our service and quality.

Will oil sands honor a three year contract if oil stays under $40?

Our largest Canadian oil sands customer was very pleased with our critical turnaround time and quality of analysis, which earned us a performance bonus in 2008. The customer stated that they were delighted with the service, which was the best they had ever received. Because of this performance, they took the unusual step of awarding Core a three-year exclusive contract.

And this may be a little slow for a few years:

Our Canadian Center for Unconventional Oil and Gas will open December 16 in Calgary. We are expecting a 40% increase in oil sands revenue for 2009, and have seen no cancellations for oil sand work for the upcoming drilling season.

In the enhancement segment:

Customer enthusiasm for our HERO, superHERO, superHERO Plus+ line of charges has been tremendous, as the revenue from these charges is up 50% from 2007 to 2008 compared to an increase in the North American rig count of only 13% year-over-year.

An independent oil and gas company in the Rockies told us that by using superHERO systems, cleanup was immediate and enabled them to circumvent the need for acid jobs after perforating. This resulted in a huge savings for them. Many other customers areReservoir Management group generated $12 million in revenue, which was a 10% growth over Q3 in 2007. Margins improved 150 basis points over Q2 and 420 basis points improvement over Q3 of 2007.

And with the current state of over-production especially in the tight shale fields will there still be a lot of activity here in 2009-2010?

The third quarter saw a continued high level of activity in our joint-industry projects. Client interest in our shale projects had continued at a rapid pace, with 11 companies joining our Haynesville Shale project this quarter, bringing the total 23 members. We also had two new companies sign on for the Marcellus Shale project, making a total of 20 members. And our industry-leading North American Gas Shale project saw its membership rise to 62 members with expansion in Canada.

Petrohawk announced a new shale discovery on -- shale gas discovery on Tuesday. Petrohawk is a member of our Gas Shales of North America study. We provided our consortium members with data from the Eagle Ford Shales earlier this year, and worked with Petrohawk in the spring to evaluate cuttings through the Eagle Ford Shale in old wells in La Salle County.

Petrohawk subsequently began a leasing program, drilled their first well, and cored the shale. We performed our gas shale evaluation program and presented the results to Petrohawk last month. We are currently working on the core from the confirmation well

International may also slow some unless we get a recovery in the price. At the time of the CC in November prices were not in the $30s.

Internationally, Core has initiated multi-client reservoir characterizations projects in Tanzania, Vietnam, and Peru, which will carry through all of 2009. In addition, our global tight-gas sands fracture stimulation optimization program has been adopted by Saudi Aramco to facilitate development and production enhancement of tight-gas sands. They join 34 North American and nine other international member companies to participate in this leading-edge technical program.

My comments may sound a little pessimistic but oil was over $50 in November:

things may have changed since the CC. We won’t know until the next call in February or so. Management’s comments may not be accounting for a further $20 per barrel decline that could be with us for a while.

But under the heading of “hoist with your own….”

Also the development of nonconventional natural gas reservoirs worldwide and the oil sands in Canada will play an important role in the future growth, as indicated by our new Canadian Center. Core's focus in North America will remain the deepwater Gulf of Mexico; the big-five shale plays, which include the Barnett, Fayetteville, Haynesville, Marcellus, and the Muskwa in Canada; tight-gas sands; and the Canadian oil sands. We believe all these projects work with $6.00 natural gas and $70 crude

And we know the near-term for at least oil sands is not bright

A bit more from the CC:

Rob MacKenzie - FBR Capital Markets - Analyst

Sure. Okay. Thanks. My next question I guess is for Monty. Monty, if we were to -- if I was to tell you that by June of next year, the US rig count will be 400 to 450 rigs lower, what do you think -- impact that would have on your business, specifically I guess Production Enhancement, but also the rest of the Company?

David Demshur - Core Laboratories - Chairman, President, and CEO

Yes, Rob. Actually, we worked up some figures on that last night. And if we look at the years 2005, 2006, 2007, and 2008 specifically for Production Enhancement, we see in the year 2006 going into 2007, when we had a similar decrease in rig count, Production Enhancement revenue growth for 2006 had averaged 27%. That decreased to 10% in 2007, and now it's back increased to 20% for 2008.

So I think we would see a similar -- we could see a similar occurrence for Production Enhancement, although I will point out that we believe that we are better positioned in Production Enhancement with the maturity and the growing acceptance of our HERO, superHERO, and superHERO Plus+ line of perforating charges and gun systems.

So we still see growth in Production Enhancement, although it won't be as robust as the upper 20s -- could be into the teens.

Here is one statement that may be subject to change at the lower price of oil today. Management predicts growth will slow to the teens—I would venture it may be flat or even negative

In North America they have a lot of business in the unconventional plays—deepwater, oil sands and shales. These may be subject to slow production at low hydrocarbon prices. It is expensive to produce from these. Oil sands has already slowed. Shale will continue to produce but less will be needed

Deepwater may hold up as the wells are in development and work probably won’t stop as the projects are focused on the long-term rather than current prices. Still, overall, I would expect NA revenue to disappoint.

Management did not believe that laying more than 10% of rigs down would be much felt. This may be optimistic. The reservoir description segment does rely in part on evaluating new reservoirs that cannot be found without drilling. Without drilling there are no core samples to analyze. Granted some of the work is done on existing fields. That may continue.

Kevin Pollard - JPMorgan - Analyst

Well, sure. But I mean I think we're certainly looking at -- if we do in fact lay down 400 rigs, wouldn't you agree that that's going to be a sharper contraction than we've seen in that time period?

David Demshur - Core Laboratories - Chairman, President, and CEO

Yes, I would agree with that. Our revenue growth went from 27% in 2006 to 10% in 2007. And I think that was in response to a number of rigs being laid down in Canada, in the US from the 2005 and early 2006 time period.

And if we look to say maybe 400 rigs being laid down from 2008 going into 2009, if we look at growth rates in 2007 for Production Enhancement, they were still at 10%. We still think that we're a little bit better positioned in that market, because we still think the big-five shale plays will be drilled. Certainly, some of the tight-gas sand developments and in the Rockies will be curtailed. But we still think we can maintain a 10% -- or maybe a little bit better growth rate in Production Enhancement for 2009.

Kevin Pollard - JPMorgan - Analyst

Okay. And then if I -- in the Reservoir Description segment, how would that segment be impacted by a slowdown in North America? Is it going to be felt primarily in the Production Enhancement, or would there be any material impact in Reservoir Description, or is that going to follow more the international spending?

Monty Davis - Core Laboratories - SVP, COO

Well, the Reservoir Description is much more into the international marketplace. You have to remember, Reservoir Description, we have a very good position in the oil sands in Canada. And we've got a backlog of shale work from our gas shale study that feeds into the Reservoir Description group. So I think we're going to be in very good shape in Reservoir Description in the coming year. It doesn't look like it will be hurt as much as Production Enhancement in any North American decline.

I expect they know the business better than I do, but oil sands is on hold. So at least in NA in both enhancement and description we are looking at potential slowing. NA is about 50% of revenue. Declining revenue means declining margins.At present I don’t have any estimates of Q4 and 2008 but I would not be surprised if Core lowers guidance. Even if they don’t get hurt this year, I am looking for 2009 to be slightly disappointing at least.

That is as much as I know right now.
I love this company in spite of how negatively I view the near-term for them. This is an excellent business. The current price may be an opportunity to get into the stock at a reasonable entry. But now may be too early. I am preferring to wait at least until I hear from the company in Q4 and see how the Q3 predictions hold up.

This company absolutely relies on the price of oil and the need to explore for new hydrocarbons and make existing fields continue to produce the maximum. Right now with closing in of production and slowing exploration Core is not escaping unscathed in spite of managements optimism they may have further to fall.


Low capex needs

Core's low CapEx needs, or 2008 CapEx, will be slightly higher than annual depreciation, plus the leverage and scalability of Core's worldwide operations has enabled the Company to generate significant amounts of free cash and free cash flow. Once again in 2008, CapEx will be approximately 3% of Core's total annual revenues against industry averages in the 12% to 15% range.

Core's CapEx equaled about $1.00 a share in 2007. It's projected to be a little bit more than $1.00 a share in 2008. This CapEx will be invested to grow international operations and help build out the Canadian Center for Unconventional Oil and Natural Gas Evaluation. For 2009, CapEx will again range between $20 million and $25 million.


Conserving cash ie not repurchasing shares or making acquisitions just yet. This is good news in that Core will not do something stupid. It also signals some bad news not completely stated. Core may be expecting a significant slowing of business and sees a need to retain as much cash as possible. In spite of the mainly upbeat guidance, this flags an undercurrent of worry.

Fixed costs allow any increases in revenue and operating income to translate directly into improving margins. This can be seen in the rapidly increasing margins over the past tow years.


The margins are expanding as revenue and operating income grow
Returns are high CFFO excellent
Capex needs fairly low


9/08 6/08 3/08 12/07 9 /07


Return on Assets 25.41% 25.43% 20.50% 23.58% 21.43%
Return on Capital 33.89% 34.67% 28.29% 33.26% 30.33%
Return on Equity 134.81% 146.68% 171.63% 217.61% 173.43%

Gross Margin 33.73% 33.78% 33.42% 34.20% 33.82%
SG&A Margin 3.39% 3.62% 4.62% 5.13% 4.14%
EBIT Margin 28.10% 27.72% 23.48% 27.78% 26.72%
Net Income Margin 19.51% 17.05% 16.35% 20.14% 18.53%

Growth yoy

Total Revenue 19.09% 17.40% 15.23% 15.41% 16.86%
Gross Profit 18.78% 21.32% 23.70% 29.49% 27.81%
EBIT 25.26% 34.50% 16.13% 36.76% 33.29%


LTM 2007 2006 2005 2004 2003 2002

Gross Margin 33.78% 33.01% 29.28% 23.86% 21.30% 20.75% 18.75%
SG&A Margin 4.15% 5.05% 5.75% 7.83% 6.58% 6.11% 6.10%
EBIT Margin 26.68% 25.57% 20.87% 12.54% 10.84% 9.55% 8.00%
Net Margin 18.27% 18.06% 14.36% 6.46% 2.88% 5.01% (2.74%)
Normalized Net 16.04% 15.93% 12.61% 6.61% 5.67% 4.79% 3.15%

Growth yoy

Total Revenue 16.85% 16.48% 19.08% 13.11% 14.54% 12.82%
Gross Profit 23.00% 31.29% 46.16% 26.70% 17.58% 24.81%
EBIT 27.45% 42.69% 98.25% 30.76% 30.10% 34.63%

CFFO, capex in millions

Cash from Ops. 148.0 125.7 120.3 74.8 54.2 59.9
capex 30.1 23.8 24.4 19.1 10.9 18.4
Acquisitions 13.9 7.3 - - 1.8 10.7
Capex*/CFFO 20% 18% 20% 25% 20% 30%

*does not include acquisitions
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No. of Recommendations: 1
Hi Kit,

I like this one a lot and could see myself owning some shares someday provided management isn't delusional and they emphasize the divi going forward. Potential to be another LDR except with significant growth potential. Although, I could see CLB being somewhat cyclical.

Management may not be delusional because with E&P's cutting back $$$s in new development projects they may step up spending on getting more out of what they already have. This could help CLB continue to thrive inspite of low oil prices.

Any idea who the oil sands client is?

Any direct competitors?

I love this company in spite of how negatively I view the near-term for them. This is an excellent business. The current price may be an opportunity to get into the stock at a reasonable entry. But now may be too early. I am preferring to wait at least until I hear from the company in Q4 and see how the Q3 predictions hold up.

Agreed. But I wouldn't be opposed to initiating a small starter position now and adding more when (if?) the price drops significantly from here and management demostrates that they are of sound mind.

At 8x cash flow and a P/E of 9, there's not much growth baked in the shares now. My quicky analysis says its attractively priced in the low 50s, but with little in the way of a margin of safety should future growth not be significant. That is, at today's price we get future growth for nothing.

Thanks for the idea,

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No. of Recommendations: 1
hey Rich

This is a pretty excellent company. It might not be a terrible idea to start a small position and see what happens as the recession deepens.

I love LDR--wish they were 100% of my port. Its a cash machine
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No. of Recommendations: 1
Hi Kit,

It might not be a terrible idea to start a small position and see what happens as the recession deepens.

Say when.

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No. of Recommendations: 2
I maintain a watch list of 2616 stocks. With the exception of less then 10 stocks, all of the stocks on my watch list are domestic companies. Alas, Core Laboratories, NV (NYSE: CLB) was not one of the exceptions.

But out of curiosity, I completed a worksheet on the company, and have now added it to my watch list.

Based on the company's latest annual financial information, which is for fiscal year ending December 2007, I added the stock to my watch list with a reasonable value estimate of $110, a price that is slightly above the stocks current second resistance point, and a price that is 83% above the stock's most recent close.

Based on my reasonable value estimate, I have a Buy target of $55, a First Sell Target of $107, and a Close Target of $116.

In review of the financial information that I found for the company, and considering the metrics that are important to me based on that financial information, I have a Strength of Statement Buy target of $46.

In other words, based on the financial metrics that are important to me, I would give management a performance grade of 83, and based on that Strength of Statement score, would adjust my Buy target accordingly.

One of the metrics I like to watch is the Cash Ratio, the ratio of Cash and Marketable Securities to Current Liabilities. I like this ratio because it removes Accounts Receivable and focuses 100% on the Cash on hand. For fiscal 2007, Core Labs' was 0.26. My worksheet target is 0.65.

Another of the things I was not real happy about, was the company's Goodwill and Intangibles to Total Assets, which for fiscal 2007, stood at 29%, about 14% higher than my worksheet target. While Goodwill and Intangibles may be required from an accounting perspective, from the perspective of an investor, me, they are pretty much worthless. So anything above 15% of Total Assets raises a management flag to me.

Another of the metrics on my worksheet is the Debt to Equity ratio. Conference call discussions about Debt are fine, but for Debt amounts to have some basis, they need to be compared to something, which for the purposes of this metric is Equity.

Generally, the Debt to Equity ratio target is determined by dividing Total Liabilities by Shareholder Equity. My Debt to Equity ratio is a bit different. I add up Notes Payable, Short Term Debt, Long Term Debt, and Capital Lease Obligations and divide that total by the Shareholder Equity. What I'm interested in is how much MY piece of the company pie will be reduced when the more senior debt holder claims are satisfied.

The target on my worksheet for this metric is 0.3, and while my calculated results for Core Labs was 4.87.

There are metrics and there are TMFGrape metrics. One of the metrics that Phil Weiss left at Fooldom was the Flow Ratio. It can be a bit of a pain in the ear to understand because it removes Cash from Current Assets and divides the result by Current Liabilities with Short Term Debt removed.

The idea is to determine just how efficiently the company's capital is being managed. The target value for the metric is 1.25. The lower the number the more prudent management is being with the receiving and deploying the company's Cash. Given current economic conditions, I would think the Flow Ratio would have quite a bit of relevance.

Lastly is the PEG Ratio, a metric which I view as pretty much worthless It is the comparison of the current price to the current analysts’ earnings growth guess. I use it just as a way to very generally verify that my reasonable value estimate is not too far off.

The idea is that if the PEG ratio is below 1, then the stock is undervalued basis the analysts’ guess for growth and if it is above one, then Tinker Bell will fly into a wall at 70 MPH.

The earnings growth guess I found for Core Labs was 20.5% (good luck with that), which gave me a PEG Ratio of 0.58. If I adjust my Reasonable Value Estimate of $110 by the PEG ratio, I get a current fair value price of about $64.

As I said, if the PEG Ratio means something to you, then congratulations, I hope you’re around to watch turtles fly.

Just a few thoughts.

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Hi Wax,

I maintain a watch list of 2616 stocks.

Sleep much? :)

Another of the things I was not real happy about, was the company's Goodwill and Intangibles to Total Assets, which for fiscal 2007, stood at 29%, about 14% higher than my worksheet target. While Goodwill and Intangibles may be required from an accounting perspective, from the perspective of an investor, me, they are pretty much worthless. So anything above 15% of Total Assets raises a management flag to me.

Another of the metrics on my worksheet is the Debt to Equity ratio. Conference call discussions about Debt are fine, but for Debt amounts to have some basis, they need to be compared to something, which for the purposes of this metric is Equity.

Generally, the Debt to Equity ratio target is determined by dividing Total Liabilities by Shareholder Equity. My Debt to Equity ratio is a bit different. I add up Notes Payable, Short Term Debt, Long Term Debt, and Capital Lease Obligations and divide that total by the Shareholder Equity. What I'm interested in is how much MY piece of the company pie will be reduced when the more senior debt holder claims are satisfied.

The target on my worksheet for this metric is 0.3, and while my calculated results for Core Labs was 4.87.

This approach is very good. I would comment that you maybe want to tweak your target ratio based on the business model.

For instance, Core Labs is a relatively asset-lite type business. So, it doesn't require large amounts of capital investment to grow. This can be very attractive from an investor standpoint as gobs of free cash can flow directly to shareholders via dividends and buybacks as opposed to being plowed back into the business as CapEx or Acquisitions.

Provided the business has some competitive advantages that are sustainable, companies like Core Labs and Sees Candy (Buffett holding) that are asset-lite are great businesses to own.

Concern about goodwill is only warranted if the company has a history of botching acquisitions. That is, the company should be able to earn high ROA, ROE, ROIC when intangibles are included in the denominator. Core seems to satisfy that. So, I'll cut them some slack.

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Hey Rich;

Sleep much? :)

I figure when I die, the only thing I'll have to do is sleep.

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2616 is a bunch. i am only up to maybe a couple of hundred
I would need an army of felines to keep up that pace

I am thinking your cash ratio is the so-called quick ratio. If you use LTM figures it's now around .61

The goodwill has been about the same since 2001. The company makes acquisitions but they have been small so not sure where that is coming from. I have not gone back to 2001 10ks to check. I am not sure how to look at goodwill any more. Since a company can't depreciate it, it stays forever unless the asset it pertains to has been impaired. So no matter what a company does, it can only grow every time the acquire something and it may be that the acquisition is good enough in spite of the goodwill to pay its way and that setting a target percentage of assets is a penalty that may not reflect the worth what they bought. I usually go with ROIC that includes goodwill. If it drops every time a company makes an acquisition that is a red flag for me.ROIC for Core is 32%

shareholder equity is low. they have bought a lot of shares back almost 10 million in 10 years for a 30% reduction. You might consider offsetting this ratio with the benefit to earnings fewer shares brings. High debt levels will definitely reduce your share of the profits since it gets paid out of cash flow. For Core the majority of debt is converts with a 0.25% coupon so it has been very cheap debt. It will convert to shares after $72 principal is paid (approximately 10.5 shares per $1000 bond). Any excess over that is given in shares. If my calculations are right they have a $213 million repayment due in 2011.LTM cash from ops was only $148 million so they may have to refinance. Debt is always an important consideration

Agree that PEG is not very useful

Thanks for all your input. Always hope to get some help and different ways to look at a company here. It makes the discussions more valuable
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thanks to the discussion of debt ratios and equity, looked back at why the $300 million was borrowed

The net proceeds received from these transactions were primarily used on other financing activities, such as paying off the $100 million outstanding balance of our existing credit facility and common stock repurchases under our share repurchase program. In 2006, we repurchased 3,837,372 of our common shares at a cost of $251.1 million which was $209.6 million more than 2005.

Our financing activities reflected a net repayment of debt of $26.8 million in 2005 and $17.1 million in 2004. In 2005, we used $41.4 million to repurchase 1,468,515 shares of our common stock, while in 2004 we used $51.3 million to repurchase 2,378,500 shares of our common stock.

Under the program, we were authorized to repurchase up to 10% of our issued common shares. This authorization was extended by our shareholders at each of our annual meetings beginning in April 1996.

In a way, the company has taken relatively low cost debt to reduce equity in the process of buying back quite a few more shares than they were issuing in options. The cost of the debt at 0.25% is less than the cost of equity so I think overall the capital structure is not damaged even though equity is so low it makes the D/E ratios fairly ugly.

It will remain to be seen how it works out when repayment is due in 2011
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